Federal Reserve to Vote on Credit Card Reforms–Finally
The Federal Reserve is going to vote this Thursday on credit card reforms that are long overdue. If you remember, MYM actually sent a comment letter to the Fed giving our opinion on the rules as they were proposed. In general, we are happy the Fed is taking action. Frankly, if they didn’t take action, Congress would have early on during the upcoming 111th Congress. But the Fed’s rules could have gone even further to protect consumers. Credit card companies have too much free reign, especially with their billing practices and interest rate changing abilities.
Below, you will see the text of our letter we drafted to the Federal Reserve. I encourage you to read it to getter a better sense of what the proposals are intended to accomplish, as well as to understand the enormity of the problem. In addition, we suggested problem areas that the Fed did not cover in their original proposals, hopefully their final rules will incorporate a few of the changes.
The text of our letter is below, to download a copy click here.
August 4, 2008
Jennifer J. Johnson
Secretary
Agencies of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington D.C. 20551
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street NW
Washington, D.C. 20552
Mary Rupp
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
VIA EMAIL TO: regs.comments@federalreserve.gov
RE: Proposed Amendments to Regulation AA, Docket No. R-1314
Dear Ms. Johnson; Chief Counsel’s Office of the OTS; and Ms. Rupp:
We appreciate the opportunity to comment on the proposed rules that the Board of Governors of
the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union
Administration (collectively, the “Agencies”) published in the Federal Register on May 19,
2008. Our comments will focus on Regulation AA (Unfair Acts or Practices) intended to
prohibit unfair or deceptive acts or practices by banks in connection with credit card accounts
and overdraft services for deposit accounts.
MilkYourMoney.com is a daily blog dedicated to helping it’s readers reach their financial goals
by making smart everyday money decisions. It’s our mission to instill in readers that anyone has
the potential to reach their financial dreams, regardless of their income level. We don’t believe
having six-figure salary or a corner office is necessary to become wealthy or financially
comfortable. Practicing frugality, discipline, and patience can turn anybody’s debt into
dividends and an early retirement into a reality. Because of the MilkYourMoney.com mission
and dedication to serving the consumer, we find the proposed rules of great interest and have
comments on the following proposals.
1. Allocation of Payments
This proposal would greatly aid consumers by properly allocating payments exceeding the
minimum payment. Many cardholders have multiple annual percentage rates (APRs) on one
account/card. For example, it’s common for a cardholder to have different APR for cash
advances than purchases. Usually, a cash advance carries the higher APR, which under the
current rules, any payment exceeding the minimum is often applied to the lower APR purchases.
This harmful practice leaves the consumer piling up greater debt at higher rates and given the
choice would never pick this type of payment allocation.
Although the proposal is a giant step forward in this area, we feel the proposal could be drafted
even stronger. As we interpret the rule, companies are allowed to allocate extra payments
equally across multiple APRs on an individual’s account. This exception should be eliminated
and any and all extra payments should be allocated to the highest APR, just as the consumer
expects when they intentionally make an extra payment toward their account. Under no
circumstances would a consumer want their extra payment allocated to the lowest APR
transaction on their account, doing so would only incur additional future interest payments and
create less available credit to the borrower.
2. Applying Rate Increases to Existing Balances
This proposal is also to the advantage of the consumer, by only allowing banks to increase the
interest rate on outstanding balances for the following three reasons: 1) the operation of an index
(variable rate); 2) the expiration or loss of a promotional rate; and 3) the minimum payment not
being received within 30 days of the due date.
Again, this proposal goes a long way in protecting cardholders of unexpected and unwarranted
rate increases on outstanding balances; however, we feel the third exception does not justify an
immediate interest rate hike. Many circumstances—not at the fault of the accountholder—could
result in delayed payments, ultimately unfairly raising their interest rate. For example,
something as simple as a payment getting lost in the mail could send an account spiraling into
default because of a heighten interest rate. The third exception should be amended to allow a
bank to raise the interest rate of an account holder if the account holder does not pay their
account within 60 days of the due date or 3 such late payments throughout a given year. These
changes would give a consumer ample time to send payment in case of situations beyond their
control.
3. Firm Offers of Credit
This proposal would require banks making firm offers of credit advertising multiple APRs or
credit limits to disclose the factors that determine whether a consumer will qualify for the lowest
APR and highest credit limit advertised.
This disclosure proposal is one with good intentions, but we fear may actually raise more
questions than answers to possible APRs and credit limits. Simply disclosing that an APR or
credit limit may differ from an advertised offer depending on credit history, debts, or income is
not a helpful disclosure to most consumers. Most consumers applying for lines of credit do not
know their current credit score or even know what factors weigh into how such a credit score is
determined. Most people applying for credit will apply without reading such a disclosure and
will find out they did not get an advertised APR or credit limit after the fact. Meaning, the credit
was already taken out in their name and the damage has been done. Consumers should plainly
know what APR they will receive and what their limit would be before agreeing to taking out a
new line of credit. A disclosure, explaining otherwise, is not sufficient enough to protect
consumers when searching for the best offers.
4. Problems Not Addressed in Regulation AA
Although the proposals laid out in Regulation AA are giant steps forward in terms of consumer
protections in the area of unfair and deceptive acts or practices by banks, the following problems
also need to be addressed and incorporated into the final adopted rules:
- The number of overlimit fees that may be applied in a single billing cycle should be fairly determined to properly put responsibility on the account holder to stay within their limit, but not overly punish them into unaffordable debt.
- Finance charges are often applied at the transaction date and not at the posting date when the money is actually financed. Finance charges should not be charged before the money is actually lent to the consumer.
- Fees charged to a consumers account for non-use of a card should be banned. Credit is something consumers earn and being charged for not using available credit is cruel and irresponsible.
- Penalty interest rates should be capped at a reasonable rate to both interested parties.
- A disclosure should be added to each monthly bill that clearly states the amount of time it will take and the cost to the consumer to completely pay off an account when only making the required minimum monthly payments.
5. Conclusion
The proposed rules are long overdue and in general are legitimate in their intentions. While we
generally feel the proposals do not go far enough, we applaud the Agencies for taking the first
and necessary steps to curb these abusive practices. We hope before the final rules are adopted,
MilkYourMoney.com suggestions in addition to various other proposed amendments filed in
conjunction with the Federal Reserve notice, will be taken into consideration. We would be
remised if we did not applaud the Congressional efforts of Congresswoman Carolyn Maloney
(D-NY) for taking the important lead on the issue and we encourage her to continue advancing
her legislation through Congress, which would codify the proposals and in many instances allow
for greater consumer protections.
Again, thank you for the opportunity to comment and please do not hesitate to contact MilkYourMoney.com if we may be of any assistance.
Sincerely,
Ben & Frank
milkyourmoney@gmail.com
MilkYourMoney.com
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Well said.